Corporate governance practices and
auditor’s client acceptance decision:
empirical evidence from Egypt
Ibrahim El-Sayed Ebaid
Ibrahim El-Sayed Ebaid is
Assistant Professor of
Accounting in the
Department of Accounting,
Faculty of Commerce, Tanta
University, Tanta, Egypt.
Received: October 2009
Revised: November 2009
Accepted: November 2009
DOI 10.1108/14720701111121047
Abstract
Purpose – The purpose of this paper is to examine the impact of corporate governance practices on
auditors’ decisions (judgments), especially, the client acceptance decision in Egypt, where corporate
governance is neither mandatory nor legally binding.
Design/methodology/approach – The study was carried out through a 2 £ 2 experimental design with
a strong level of corporate governance (the board of directors and audit committee) versus a weak level
of corporate governance (the board of directors and audit committee).
Findings – The findings of the study revealed that strong corporate governance is associated with more
favorable acceptance judgments than weak corporate governance. These results suggest that the
voluntary adoption of corporate governance practices by Egyptian companies enhances the quality of
financial reporting process and, therefore, affects auditors’ decisions (judgments).
Research limitations/implications – The results of the study should be considered by regulators in
Egypt in order to begin the necessary actions for legally pending the Egypt Code of Corporate
Governance, issued on October 2005. However, owing to the relatively small sample size, these findings
should be interpreted with caution.
Originality/value – The paper contributes to the limited body of research on the impact of corporate
governance on auditor’s client acceptance decision by examining this impact in Egypt, where corporate
governance is still not mandatory.
Keywords Corporate governance, Boards of Directors, Egypt
Paper type Research paper
Introduction
The decision to accept a prospective client or continue the contract of an existing client is
increasingly important due to continued fee pressure and increased risk of litigation
(Johnstone and Bedard, 2003). Client acceptance decision is the first line of defense against
risks and, therefore, this decision is a crucial factor in risk the containment activities of
auditing firms. By effectively screening out risky prospective clients auditing firms can guard
against the risk of litigation (Johnstone, 2001). Prior research suggests that the evaluation of
client-related risks (including: audit risk, client business risk, and auditor business risk) is the
first stage in client acceptance decisions made by auditing firms (Johnstone and Bedard,
2003; Bell et al., 2002; Johnstone, 2000). Johnstone (2000) suggests that partners screen
clients based on the clients’ risk characteristics and based on the auditing firm’s risk of loss
on the engagement; more importantly, the partners did not use more proactive
risk-adaptation strategies (adjust audit fees or audit procedures) to make less acceptable
clients more acceptable. Johnstone and Bedard (2003) reveal that while risky clients are less
likely to be accepted overall, the application of particular risk-management strategies to
particular risks may increase the likelihood of accepting such clients. Professional standards
address the client acceptance decision; for example, the Quality Control Standards of the
AICPA require that auditing firms should maintain policies and procedures that help in
making client acceptance decisions that minimize the likelihood of accepting clients whose
VOL. 11 NO. 2 2011, pp. 171-183, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 171
 management lacks integrity (QC 20.14). The Statement on Auditing Standards No. 84 (SAS
84) requires auditors to communicate with the preceding auditor to inquire about
disagreements with management, fraud, illegal acts, and internal control before accepting
new clients. Also, the International Standards on Auditing state that before accepting a new
client, auditors should consider whether an association with this client creates any threats to
compliance with professional standards (International Federation of Accountants, 2007).
However, these professional standards do not explain how auditor incorporates that
information in making client acceptance decisions.
Corporate governance has achieved growing recognition in recent years in response to
financial reporting scandals such as Enron, WorldCom, Adelphia, and Parmalat, which
diminished confidence in the independence and reliability of not only the auditing firms
involved, but also the accounting profession and financial markets as a whole. Many reforms
have been initiated by regulators in many countries in order to strengthen corporate
governance practices and restore public confidence. The Sarbanes-Oxley Act of 2002
(SOX) in the USA is the most illustrative example of a government response to these financial
reporting scandals. One of the most important functions of corporate governance is to
enhance the quality of the financial reporting process (Cohen et al., 2004). Prior research
has found a significant association between effective corporate governance practices and
decreased financial reporting risks, especially financial reporting fraud, earnings
manipulation and restatements, and therefore a significant association between effective
corporate governance practices and the quality of the financial reporting process (Jiang
et al., 2008; Davidson et al., 2005; Abbott et al., 2004; Cohen et al., 2002; Klein, 2002;
Beasley et al., 2000; Abbott et al., 2000; Beasley, 1996; Dechow et al., 1996; Jiambalvo,
1996). If effective corporate governance practices are significantly associated with the
quality of the financial reporting process, then it is expected that such practices will
influence auditors’ assessments of client-related risk and, therefore, influence the client
acceptance decision (judgment). Therefore, it is expected that auditors will be more (less)
willing to accept a prospective client or to continue the contract of an existing client in the
presence of stronger (weaker) corporate governance practices (Cohen and Hanno, 2000).
The purpose of this study is to examine the impact of corporate governance practices on
auditors’ client acceptance decisions in Egypt. In fact Egypt, as one of the emerging or
transition economies, is a unique case. Egypt, among others, responded to the growing
attention surrounding corporate governance by reforming the Egypt Code of Corporate
Governance: Guidelines and Standards in October 2005. The rules included in this code
focus on various aspects of corporate governance, especially boards of directors, audit
committees, internal audit departments, external auditors, disclosure of social policies and
avoiding conflicts of interest. The main difference between corporate governance
environment in Egypt and other developed countries – especially the USA – is that the
corporate governance rules included in the Egypt Code of Corporate Governance:
Guidelines and Standards are neither mandatory nor legally binding. Rather, the purpose of
these rules is to promote responsible and transparent behavior in managing corporations
according to international best practices and means that strike an equilibrium between
various parties’ interests. In an institutional setting where the adoption and monitoring of
corporate governance practices is not mandatory and lacks legislative force, such as Egypt,
it is not clear how auditors would react to client’s voluntary adoption of corporate governance
practices (Sharma et al., 2008).
The governance practices considered in this study include the board of directors and the
audit committee. The main attributes that determine effectiveness of the board of directors
and the audit committee examined in this study are independence, financial expertise, size,
and meeting frequency. These attributes are based on the significant attributes noted in the
literature (e.g. Ebrahim, 2007; Zhang et al., 2007; Abbott et al., 2004; Xie et al., 2003; Klein,
2002, Abbott et al., 2000; Carcello and Neal, 2000; Dalton et al., 1999; Dechow et al., 1996;
Beasley, 1996).
By using a 2 £ 2 experimental design with strong board of directors versus a weak board of
directors, and a strong audit committee versus weak audit committee, the findings of the

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study reveal that a stronger (weaker) board of directors or audit committee will result in more
(less) favorable acceptance decisions (judgments). These results suggest that the voluntary
adoption of corporate governance practices by Egyptian companies enhances the quality of
the financial reporting process, and therefore affects auditors’ decisions (judgments).
The rest of the paper is organized as follows: the next section gives a summary review of the
related literature. The third section briefly describes the institutional setting of corporate
governance in Egypt. The fourth section deals with hypothesis development. The fifth
section describes the research method; the sixth section presents the analysis of research
results. The final section provides a summary and conclusion.

Literature review
Prior research has examined the effect of corporate governance on auditors’ decisions
(judgments). Cohen and Hanno (2000) find that management control philosophy and
corporate governance structure affect auditors’ pre-planning (client acceptance) and
planning (extent and timing of testing) judgments; specifically, auditors were more willing to
recommend client acceptance and more likely to reduce substantive tests in the presence of
a stronger corporate governance or management control philosophy. Bedard and
Johnstone (2004) examined auditors’ assessments of and planning and pricing decisions
related to earnings manipulation risk and corporate governance risk, and showed that
auditors plan increased effort and billing rates for clients with earnings manipulation risk and
that the positive relation between earnings manipulation risk and both effort and billing rates
are greater for clients that have heightened corporate governance risk. Lee et al. (2004)
found that an independent audit committee and board members who are concerned about
incurring legal liability and harming reputation support external auditors in accomplishing
their assurance duties. Therefore, auditors are less (more) likely to resign from clients with
higher (lower) levels of corporate governance quality. Parker et al. (2005) found a significant
association between some corporate governance factors, i.e. CEO, blockholder ownership,
audit committee independence, board independence and auditors’ going-concern
assessments. Yatim et al. (2006), Abbott et al. (2003) and Carcello et al. (2002) examined
the relationship between corporate governance and audit fees, finding that external audit
fees are positively and significantly associated with good corporate governance (the board
of directors’ and audit committee’s, independence, expertise, and meeting frequency).
Cohen et al. (2007) examined the effect of the role of the board of directors in monitoring
management (agency role) and/or the role of the board in helping to formulate corporate
strategies (resource dependence role) on the auditors’ planning judgments, and showed
that auditors respond to the role of the board when making judgments with respect to control
risk assessments and the planned scope of audit tests.
Some studies have examined the effect of various corporate governance practices,
especially those mandated by Sarbanes-Oxley Act of 2002 (SOX), on auditors’ decisions
(judgments). Frankel et al. (2002) suggested a positive association between non-audit fees
and discretionary accruals as a proxy of a low quality of financial reporting. However, other
researchers (Reynolds et al., 2004; Ashbaugh et al., 2003) found results inconsistent with
Frankel et al. (2002) after controlling for firm performance or growth. Asare et al. (2005) found
that a higher (lower) level of client risk decreased (increased) the likelihood of acceptance,
and that this relation did not vary with the potential to provide non-audit services that do not
support the prohibition of audit firm from providing certain non-audit services to audit clients.
With respect to the impact of auditor rotation, several studies (e.g. Carcello and Nagy, 2004;
Geiger and Raghunandan, 2002) found significantly more audit reporting failures in the
earlier years of auditor/client relationships than when auditors had served these clients for
longer tenures that do not support the mandatory auditor rotation. Using the discretionary
accrual models of earnings management, some researchers (e.g. Myers et al., 2003;
Johnson et al., 2002) found that earnings management practices declined with auditor
tenure, which means that longer auditor tenure is associated with higher auditing quality
and, therefore, higher earnings quality. In contrast, other studies suggest that extended
partner tenure related to a lower propensity to issue a modified (going-concern) opinion

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 (Carey and Simnett, 2006) or affect the likelihood that a going-concern qualified audit
opinion will be removed (Meyer et al., 2007).
Menon and Williams (2004) find that firms employing former partners as officers or directors
report larger accruals than other firms. Lennox (2005) suggests greater abnormal accruals
in firms appointing former audit firm employees as executives and officers. In contrast,
Geiger et al. (2005) suggest that employing former auditors has no significant effect on
either total accruals or non-operating accruals. Naiker and Sharma (2009) find a negative
association between the presence of former audit partners on the audit committee who are
affiliated and unaffiliated with the firm’s external auditor and internal control deficiencies
reported under section 404 of the Sarbanes-Oxley Act.
While studies mentioned above have examined the potential impact of mandatory corporate
governance on auditors’ decisions (judgments), Sharma et al. (2008) is the only prior study
to consider the effect of non-mandatory corporate governance practices (the board of
directors and audit committee) on a comprehensive set of audit judgments including client
acceptance, risk and planning judgments showing that strong corporate governance is
related positively to favorable acceptance judgment and negatively to control environment
risk and the extent of substantive tests. The purpose of this study is to contribute to the
understanding of the impact of corporate governance on auditors’ decisions, especially
client acceptance decisions in Egypt, where corporate governance practices are neither
mandatory nor legally binding. In an institutional setting where the adoption and monitoring
of corporate governance practices is not mandatory and lacks legislative force, such as
Egypt, it is important to examine how auditors would react to clients’ voluntary adoption of
corporate governance practices.

Institutional background in Egypt

On October 2005, the Center of Managers, an agency authorized by the ministry of
investment in Egypt, issued the Egypt Code of Corporate Governance: Guidelines and
Standards, which includes a number of rules to be considered in addition to the
corporate-related provisions stated under other laws (i.e. Law 159/1981 of shareholding joint
stock, partnerships, and limited liability companies, and Capital Market Authority Law
95/1992, which regulates companies listed on the Egyptian Stock Exchange). The rules
included in this Code focus on various aspects of corporate governance, especially general
assembly, boards of directors, internal audit departments, external auditors, disclosure of
social policies, and avoiding conflicts of interest.
With respect to the board of directors, the Code states that companies should have a board
of directors that is responsible for closely monitoring the general status of the company
without delegation of this task to others (Rule 3-7). The board should set out rules and
procedures that insure the company’s compliance with existing laws and regulations and
disclosure of information to shareholders, creditors, and other stakeholders (Rule 3-8). Also,
the board is responsible for reviewing internal controls and assessing their appropriateness
and efficiency (Rule 3-19), and also is responsible for risk management in accordance with
the nature of company’s activities, size, and market in which it operates; specifically, the
board assumes the responsibility for laying down a strategy for identifying threats faced by
the company, means of managing them, and the degree of operational risk exercised (Rule
3-25). With regard to board composition and meeting, the Code states that the board should
comprise a majority of non-executive directors with an appropriate mix of skills, and
technical and analytical experience. All non-executive directors should dedicate the time
and attention necessary to fulfill their responsibilities, and should not accept assignments
that could be seen to be a conflict of interest (Rule 3-4). The board of directors should meet
at least once every three months (Rule 3-17), non-executive directors can meet at any time
with management for consultation on any of their tasks with or without the attendance of the
executive directors (Rule 3-18).
With respect to audit committees, the Code states that an audit committee should be
comprised of at least three non-executive board members, at least one of whom should have
adequate financial and accounting expertise. If the number of non-executives on the board

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of directors is less than three, one or more members may by appointed from outside the
company (Rule 6-1). The audit committee is responsible for performing many functions,
including:
B evaluating the efficiency of the financial manager and other financial staff;
B examining internal controls;
B reviewing financial statements before submission to the board of directors;
B reviewing the company’s accounting policies;
B reviewing the audit plan with the external auditor;
B assessing the qualifications, performance, and independence of the external auditor and
providing recommendations regarding external auditor appointment and remuneration;
B approving the external auditor’s engagement to provide non-audit services and
determining appropriate remuneration; and
B reviewing the internal audit plan and assessing its efficiency and capacity (Rule 6-2).
Finally, the Code states that the audit committee should meet periodically at least once every
three months with a specified agenda (Rule 6-3).

Hypothesis development
The board of directors
The board of directors assumes an important role in corporate governance. Owing to the
separation of corporate management and ownership, boards exist to protect the interests of
shareholders (DeZoort et al., 2002). The board of directors is charged with monitoring and
disciplining senior management, and therefore assuring the quality of financial reporting.
Several studies (e.g. Anderson et al., 2004; Klein, 2002; Carcello and Neal, 2000; Beasley,
1996) provide evidence regarding the importance of the role of the board of directors in
monitoring financial reporting, and therefore mitigating the manipulation of accounting
information.
Prior research reveals that the effectiveness of the board of directors’ oversight role can be
influenced by attributes such as board size, board independence (percentage of outside
directors on the board), board members’ expertise, and meeting frequency. Larger boards
may be more effective in monitoring senior management due to an increased ability to
distribute the oversight load over a greater number of observers. Dalton et al. (1999) found a
positive, significant relationship between board size and firms’ financial performance. Xie
et al. (2003) suggested that larger boards related to a lower level of discretionary accruals.
Outside directors have an incentive to monitor management because the value of their
human capital is partially determined by the effectiveness of their monitoring performance
(Fama and Jensen, 1983). Therefore, independent (outside) directors are more willing to
provide effective oversight. Dechow et al. (1996) found that firms whose CEO also chaired
the board of directors were more likely to be subject to accounting enforcement actions by
the SEC for GAAP violation. Beasley (1996) suggested that the proportion of independent
directors on the board was negatively related to the likelihood of financial reporting fraud.
Klein (2002) founds that board independence and board size are negatively associated with
abnormal accruals. Xie et al. (2003) suggested that greater independent outside
representation on the board, background in corporation, finance, or law, and meetings
frequency were related to a lower level of discretionary accruals. Anderson et al. (2004)
found that board independence and board size were associated with increased accounting
report integrity, and therefore a lower cost of debt financing. Ebrahim (2007) suggested that
earnings management was negatively associated with the independence of the board of
directors and its audit committee. Zhao and Chen (2008) found that staggered boards (a
potent anti-takeover device) as a proxy of the quality of corporate governance were
associated with lower likelihoods of committing fraud and smaller magnitudes of absolute
unexpected accruals.

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 The first hypothesis of the study is that large board of directors composed of a majority of
independent (outside) directors who have adequate financial literacy and expertise and
meet more frequently is more able to play a stronger oversight role in financial reporting
process and, therefore, will be positively related to favorable client acceptance decisions.
This leads to the first testable hypothesis:
H1. Auditors’ client acceptance decision (judgment) will be more favorable in the
presence of stronger board of directors than when the board of directors is weaker.

Audit committee
Given its diverse responsibilities, the board of directors delegates some of its oversight to an
audit committee and other committees of the board. The audit committee is responsible for
recommending the selection of an external auditor, ensuring the soundness and quality of
internal accounting and control practices, and monitoring the external auditor’s
independence from senior management (Anderson et al., 2004). McMullen (1996)
suggested that the existence of an audit committee was associated with a lower
incidence of shareholder litigation alleging management fraud, quarterly earnings
restatements, SEC enforcement actions, illegal acts, and auditor turnover due to
accounting disagreement with management.
Prior research reveals that effectiveness of the audit committee’ oversight role could be
influenced by characteristics such as audit committee members’ independence, financial
literacy and expertise, and activity (number of committee meetings per year). Abbott et al.
(2000) found that firms that had audit committees composed entirely of independent
directors meeting at least twice annually were less likely to be sanctioned by the SEC for
fraudulent or misleading financial reporting. Carcello and Neal (2000) found that the greater
the percentage of affiliated directors on the audit committee in firms experiencing financial
distress, the lower the probability the auditor would issue a going-concern report. Klein
(2002) suggested a negative relationship between audit committee independence and
abnormal accruals. Abbott et al. (2004) found that the audit committee’s independence, the
presence of at least one member with financial expertise, and meeting at least four times per
year exhibited a significant and negative association with the occurrence of restatement.
Anderson et al. (2004) found that an independent audit committee was associated with
increased accounting report integrity and therefore a lower cost of debt financing. Krishnan
(2005) and Zhang et al. (2007) found that firms were more likely to have internal control
weaknesses if their audit committees were less independent and had less financial expertise
or, more specifically, had less accounting financial expertise and non-accounting financial
expertise. DeZoort et al. (2008) found that audit committee support for an auditor-proposed
adjustment was significantly higher in the post-SOX period and that greater audit committee
member support for the proposed adjustments was higher for members who were CPAs
than members who were non-CPAs.
The second hypothesis of the study is that an audit committee composed entirely of
independent (outside) directors who have adequate financial literacy and expertise and
meet more frequently will be more able to play a stronger oversight role in financial reporting
process and will therefore be positively related to favorable client acceptance decisions
(judgments). This leads to the second testable hypothesis:
H2. An auditor’s client acceptance decision (judgment) will be more favorable in the
presence of stronger audit committee than when the audit committee is weaker.

Research method
Design
The study uses a 2 £ 2 experimental design with a strong board of directors versus a weak
board of directors, and a strong audit committee versus a weak audit committee yielding
four case versions. Participants were randomly assigned to one of these four case versions.
Each case included a cover sheet, case material, and additional questions. The cover sheet
requested participation and provided general instructions including a guarantee of

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 anonymity. The case material began with background information about a prospective client
including client size (sales volume), industry information (intensity of competition and client’s
market share), information about listing status, ownership structure, and financial statements
containing five years of data. The case material revolved around a realistic case involving a
company belonging to the communications industry in which technology and competition
are constantly changing. Subsequently, the case material included information about the
client’s corporate governance structure (the board of directors and audit committee). The
manipulation of the board of directors and audit committee are shown in Table I. These
manipulations are based on significant attributes noted in the literature (e.g. Ebrahim, 2007;
Zhang et al., 2007; Abbott et al., 2004; Xie et al., 2003; Klein, 2002, Abbott et al., 2000;
Carcello and Neal, 2000; Dalton et al., 1999; Dechow et al., 1996; Beasley, 1996). Given the
lack of empirical evidence as to which specific attributes of the board of directors and audit
committee are of greatest importance, these attributes were co-varied to reflect either a
strong or a weak board of directors and/or audit committee.
Since the purpose of the study is to examine the impact of corporate governance practices
on client acceptance decision, the background information was held constant for all four
case versions. The participants were required to use this information to perform a judgment
related to their client acceptance recommendation. The case also included a demographic
question to explore the profiles of the respondents.

Participants
The participants were 49 audit managers and partners experienced in performing client
acceptance judgment from auditing firms in Egypt. The study includes only audit managers
and partners and excludes lower level staff because the latter are less likely to have
sufficient experience and knowledge to address corporate governance issues and to make
appropriate client acceptance judgments. Experimental cases were delivered to each of the
auditing firms’ representatives in random order. The representatives were asked to randomly
distribute the sealed envelopes containing the experimental cases. Of 105 experimental
cases delivered, 55 cases were returned, resulting in return rate about 52 per cent. However,
six of these cases were excluded from because the participants indicated that they had
insufficient prior involvement in various phases of client acceptance decisions. Statistical
tests for a firm effect did not reveal any significant difference (p ¼ 0:32) in either the
demographic or the dependent variable.

Dependent variable
Based on the information provided in the case materials, participants were asked to indicate
their recommendation regarding the acceptance of the prospective client on a seven-point
Likert-type scale. The low endpoint of the scale was labeled ‘‘very unfavorable client’’, while
the high end of the scale was ‘‘very favorable client’’.

Table I Manipulation of the board of directors and audit committee effectiveness

Strong board of directors Weak board of directors Strong audit committee Weak audit committee

The client has a large board of
directors
The client has a board of
directors with a majority of
non-executive (outside)
members
The board contains an adequate
number of directors who have
financial literacy, especially
expertise in accounting
The board of directors meets
regularly, at least four times a
year
The client has a small board of
directors
The client has a board of
directors with a majority of
executive (CEO) members
The board does not contain an
adequate number of directors
who have financial literacy,
especially expertise in
accounting
The board of directors has no
regular meeting agenda
The client has an audit
committee consisting of three
members of non-executive
(outside) directors
The audit committee includes at
least one member who has
financial literacy, especially
expertise in accounting
The audit committee meets
regularly at least twice a year
The client has an audit
committee consisting of three
members of executive (CEO)
directors
The audit committee does not
include any member who has
financial literacy, especially
expertise in accounting
The audit committee has no
regular meeting agenda

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 Independent variables
The experimental treatment in the study is the board of directors and audit committee,
manipulated as weak or strong. As stated previously, the attributes that affect the
effectiveness of the board of directors and audit committee mentioned in Table I are the
attributes noted in the prior literature.

Results
Profile of participants
The responding participants’ profile is presented in Table II. Table II shows that all
participants (partners and audit mangers) were male. This is due to the accounting
profession, among other professions, being an unfavorable profession for Egyptian women.
As expected, the years of audit experience and the number of involvements in client
acceptance decisions for partners were greater than the years of audit experience and the
number of involvements in client acceptance decisions for audit managers, but importantly
there was no significant differences in the dependent variable due to the differences in either
the years of audit experience or the number of involvements in client acceptance decisions.

Manipulation check
In order to insure that the board of directors’ and audit committees’ effectiveness conditions
were perceived by the participants as intended in the research design, the study conducted
a manipulation check to check the manipulation of experimental treatments. For the board of
directors manipulation, the participants were asked to indicate, on a seven-point Likert-type
scale (from 1 ¼ very low to 7 ¼ very high), their judgment about the ability of the board of
directors to oversee the management effectively. Similarly, for audit committee manipulation
the participants were asked to indicate, on a seven-point Likert-type scale (from 1 ¼ very low
to 7 ¼ very high), their judgment about the ability of the audit committee to oversee the
management effectively. The participants who received the stronger board of directors
version of the case indicated a mean (standard deviation) of the board effectiveness in
monitoring management of 6.41 (0.51), compared with 1.82 (1.01) for the participants who
received the weaker board of directors version of the case. The difference in means is
statistically significant at p ¼ 0:000 (t ¼ 16:87). Similarly, the participants who received the
stronger audit committee version of the case indicated a mean (standard deviation) of the

Table II Profile of participants

Frequency Percentage
Partners Managers Partners Managers

Gender
Male 13 13 100 100
Female – – – –
Total 13 36 100 100

Years of audit experience

0-5 – – – –
6-10 – 12 – 33
11-15 – 14 – 39
16-20 7 10 54 28
More than 20 6 – 46 –
Total 13 36 100 100

Number of involvements in client acceptance decisions

0-5 times – 4 – 11
6-10 times 1 6 8 17
11-15 times 2 21 15 58
16-20 times 8 5 62 5
Over 20 times 2 – 15 –
Total 13 36 100 100

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 audit committee’s effectiveness in monitoring management of 5.88 (0.99), compared with
1.59 (1.06) for the participants who received the weaker audit committee version of the case.
The difference in means is also statistically significant at p ¼ 0:000 (t ¼ 11:88). In general,
the results cited above reveal that the participants perceived the manipulations as intended
for both the board of directors and audit committee.

Client acceptance judgment

H1 and H2 examine the impact of the board of directors and audit committee effectiveness
on auditors’ client acceptance judgment. Tables III and IV present the means and standard
deviations for the effect of the board of directors and audit committee on auditors’ client
acceptance recommendation for the main effects (Table III) and for each experimental
condition (Table IV). As shown in Tables III and IV, the results suggest that a stronger board
of directors and a stronger audit committee will result in more favorable acceptance
judgments than a weaker board of directors and a weaker audit committee. Table V
presents the ANOVA results for the impact of the board of directors and audit committee on
client acceptance judgment. The results shown in Table V reveal that the board of directors
has a significant impact on the auditors’ client acceptance recommendation (p ¼ 0:000),
as did the audit committee (p ¼ 0:000). Also, there is a significant interaction between the
two (p ¼ 0:000). Accordingly, the ANOVA results presented in Table V and cell means
presented in Tables III and IV support the hypothesis that a stronger (weaker) board of
directors or audit committee will result in more (less) favorable acceptance judgments.
These results suggest that the voluntary adoption of corporate governance practices by
Egyptian companies enhances the quality of the financial reporting process, and therefore
influences the auditors’ assessments of the client-related risk and, accordingly, affect the
auditors’ decisions (judgments), especially the client acceptance decision (judgment).

Table III Means and standard deviations of acceptance recommendation judgment categorized by main effect
Sample size Acceptance recommendation SD

Board Stronger 26 5.958 0.806

Board Weaker 23 3.720 2.131
Committee Stronger 26 6.000 0.866
Committee Weaker 23 3.541 2.043

Note: Participants assessed the client acceptance recommendation on a seven-point scale ranging from 1 ¼ very unfavorable client to
7 ¼ very favorable client

Table IV Means and standard deviations of acceptance recommendation judgment categorized by treatment group
Strong board SD Weak board SD Overall SD

Strong committee 6.500 0.674 5.428 0.851 5.923 0.935

Weak committee 5.416 0.515 1.545 0.820 3.562 2.085
Overall 5.958 0.806 3.720 2.131 4.816 1.965

Table V Analysis of variance (ANOVA) of acceptance recommendation judgment

Source df Mean square f-value p-value

Intercept 1 1,084.661 2,027.614 0.000

Board 1 74.253 138.806 0.000
Committee 1 74.971 140.146 0.000
Interaction 1 23.826 44.539 0.000
Error 45 0.535

Notes: n ¼ 49; R 2 ¼ 87 per cent

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 Conclusion
This study aimed to examine the impact of corporate governance practices on auditors’
judgments, especially the client acceptance decision in Egypt, an emerging or transition
economy where corporate governance is still voluntary. These unique conditions increase
the importance of exploring the impact of voluntary adoption of corporate governance by
Egyptian companies on auditors’ judgments (decisions). The two main features of corporate
governance examined in this study are the board of directors and the audit committee.
Using a 2 £ 2 between-subjects experimental design with a strong level of effectiveness of
the board of directors versus a weak level of effectiveness of the board of directors, and a
strong level of effectiveness of the audit committee versus a weak level of effectiveness of
the audit committee, the findings of the study reveal that auditors significantly assess higher
(lower) favorable client acceptance judgments when the board of directors is stronger
(weaker) or/and when the audit committee is stronger (weaker). These results suggest that
the voluntary adoption of corporate governance practices by Egyptian companies
enhances the quality of the financial reporting process, and therefore influences auditors’
assessments of the client-related risk, and accordingly affects auditors’ decisions,
especially the client acceptance decision (judgment).
The results of the study have significant implications for regulators and researchers in Egypt.
First, the results mentioned above signify the importance of corporate governance
mechanisms in enhancing the quality of financial reporting process. Thus, these results
should be considered by regulators in Egypt in order to begin the necessary actions for
legally pending the Egypt Code of Corporate Governance, issued on October 2005 by the
Ministry of Investment and as yet still voluntary. Second, the study provides evidence on how
auditors respond to the strength of a client’s corporate governance when making client
acceptance assessments. Further research is needed to examine how auditors respond to
the strength of a client’s corporate governance when making other judgments, especially
risk assessment and audit planning judgments. A number of individual attributes could
affect the strength of the board of directors and audit committee; this study did not conclude
which of these attributes had a greater or lesser impact on auditors’ judgments. Thus, future
research is needed to examine the impact of these attributes individually.

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Further reading
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on Quality Control Standards, American Institute of Certified Public Accountants, New York, NY.

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Managerial Auditing Journal, Vol. 21 No. 9, pp. 921-33.

Corresponding author
Ibrahim El-Sayed Ebaid can be contacted at: ebaid2010@yahoo.com

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